A Company Sells Inventory to Its Subsidiary, B Company at a Mark-Up

question 22

Multiple Choice

A Company sells inventory to its Subsidiary, B Company at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare Consolidated Financial Statements? The inventory is still in B's warehouse at year end.

• A) This is not significant. Any inter-company profits are eliminated during the Consolidation process.
• B) A's net income will be under-stated.
• C) B's income will be over-stated.
• D) There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders.

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